Archive for June, 2009

Minneapolis Duplex Sales Pull An All-Nighter

said on June 30th, 2009 categorized under: Twin Cities Real Est

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taking a rest from homeworkWell, it’s the Continuing Education deadline for Realtors is today.

As a result, there’s a mad scramble around the office as we procrastinators try to finish up the last of our state required annual education and turn in proof we did it.

Yes, yours truly was among the procrastinators; one who pulled an abbreviated version of an all-nighter in order to make the state capital happy. 

Apparently the folks over at MAAR aren’t procrastinators, because they managed to get their Weekly Activity Report out on time. And it contained some really interesting information.

First, the total number of homes for sale in the Twin Cities metro is down 20.9 percent from where it was one year ago.

Second, for the week ending June 20, sales were up a whopping 32.1 percent from their mark for the same week in 2008. So, for 12 of the last 13 weeks there’s been an increase in sales over 2008 of more than 20 percent.

Woo hoo! Right?

Unfortunately, traditional home sales — meaning those actual humans own are still down 17.8 percent from last year. Sales of homes priced over $350,000 are down 26.8 percent from one year ago.

In other words, the bulk of the sales activity in the market right now is in the lower price ranges, on bank foreclosures.

The multi-family sector of the market meanwhile, posted another week of robust pending sale activity; up 46.4 percent from the same stretch in 2008. Of these, 85 percent were bank owned or mediated.

While the number of new listings was up 5 percent week over week, “just” 75.4 percent of these involved negotiations with a lender. This is down from the 90-plus percent we saw earlier in the year.

Finally, while the average off-market price for the week was $120,043, the 2008 mark was roughly only $7000 higher.

Now, I need a nap…

What Should You Improve In Your Minneapolis Duplex?

said on June 26th, 2009 categorized under: Home Repair

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can of green paint and brushOne of the challenges facing many duplex and single family home buyers in today’s foreclosure-laden real estate market is that many of these properties havea significant amount of deferred maintenance.

And it’s tempting, regardless of the type of property purchased, to “Pimp My Ride” with every conceivable improvement featured on HGTV or in the aisles of Home Depot.

Before you max out your credit cards, spend all of your $8000 first time home buyer tax credit or burn through your 203(k) construction loan, it’s important to stop and think who you’re improving the property for, and just what your return on those expenditures will be.

Just as improving a kitchen or adding landscaping increases the value of  a single family home, upgrades to duplexes do as well.  Before you start putting granite countertops in your rental units, however, it’s important to ask yourself a couple of questions.

First, if your intention is to ultimately sell the property, think about who your eventual buyer might be. Is your property one that lends itself to an owner occupant? To answer this, simply ask yourself whether you would live there.

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Comments Off on How Much Should You Put Down On A Minneapolis Duplex Contract for Deed?

House and Money with Pad of Paper and PenWith today’s tightened lending standards, many investors are having a difficult time finding financing. As a result, the contract for deed has once again emerged as a viable option.

I have had two buyers ask me this week alone to find them property where the seller is willing to do the financing.

Believe it or not,  there are properties on the MLS right now where this is an option. Many sellers, for whatever reason, simply need to no longer have the managerial responsibilities of a property.

Of course, the seller also wants to make money on his duplex.

While most forms of seller financing carry a higher than market interest rate, they often also require less of a down payment. At the moment, most banks are requiring a down payment of 25 percent on a non owner-occupied investment property. Private sellers willing to carry financing will often ask for less.

How much less?

Let’s look at it from the seller’s perspective.

If his duplex is actively on the MLS, he has signed a contract with a real estate broker. In the event the property sells as a result of his Realtor’s efforts, he is legally bound to pay a commission based on a percentage of the sales price.

So, if he’s bound to pay six or seven percent in commission on say a $200,000 property, that’s $12,000-$14,000.

In that case, is he going to be ok with a buyer putting $5000 down?

Probably not. If he did, he would have to go into his own pocket to pay not only the rest of the commission, but closing fees as well.

What’s the likelihood of finding a seller willing to do this?

You tell me.

Minneapolis Duplex Sales Up Again

said on June 23rd, 2009 categorized under: Twin Cities Real Est

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horloge2It’s Tuesday. Which means it’s time once again for the Weekly Market Activity Report from our friends over at the Minneapolis Area Association of Realtors.

For the week ending June 13, pending sales were up 33.8 percent from the mark they set over the same stretch last year. Meanwhile, there continued to be less new inventory coming on the market; down 2.6 percent from the 2008 mark.

Over in the small multi-family market, the number of properties that received purchase agreements was up 36 percent week over week. Twenty percent of theses pended duplexes did not involve a lender in the negotiations, up 4 percent from the ratio for 2008.

Unlike last week, the average off market price for these properties, however, did not surpass last year. The good news is at $122,693, they trailed last year’s average by just $3002.

Like their single family home counterparts, new multi-family listings were also down for the second week in June; dropping 16.4 percent from their 2008 mark.

On the surface, anyway, it looks like things may be leveling off. But we’ll see what the rest of the summer brings.

HGTV Rehabs Minneapolis Duplexes Too

said on June 22nd, 2009 categorized under: Home Repair

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scottmcgillivray_s3x4_alBelieve it or not, there’s a home improvement show for duplexes.

While it hasn’t gotten a ton of press, if you’re going to be home Wednesday night, you might want to check out the HGTV show, Income Property.

Hosted by Scott McGillivray, the premise is basically this.  First time homeowners buy a duplex or a single family home and gets in over their head. Either the rental unit is trashed, resulting in a longer term vacancy or, the owner of a house is financially strapped and needs to generate extra revenue in order to make the mortgage payment.

In the case of the latter, the solution is to turn a portion of their home (usually the basement) into an apartment.

The property owner is given the opportunity to either have the show do a “Lipstick Job”, which is typically a fast turn so the unit can be rented immediately. Or, they can have the big, extensive rehab.

The show has useful tips for both new property owners and experienced investors, including which materials to use to attract tenants, how to decide whether the cost of a renovation will generate an appropriate return, and which repairs and upgrades should be tackled first.

“Income Property” airs in the Twin Cities on Wednesdays at 8:30 pm.

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Golden yearOne thing all duplex, investment property and single family home owners have in common is a hope for a speedy rebound in real estate prices.

This is especially true of those who want to or need to sell. The flood of short sale and foreclosure properties on the market have dramatically reduced property values; especially if the duplex was purchased in the last five to seven years.

As a result, many prospective sellers are sitting on the sidelines, waiting for a market recovery. Well, a new study from the Federal Housing Finance Agency, (which regulates Fannie Mae and Freddie Mac), suggests they may be there a while.

The FHFA study examines local and regional housing busts over the last several decades. It finds that it can take more than a decade for prices to return to their previous peaks after they fall, while the fall itself tends to be far swifter than the recovery.

The report looked at markets in the Southwest, Detroit, California and Texas. And while no Minnesota city appears in the 40 metro areas included in the study, it is, nonetheless, a worthy read.

FHFA’s Jesse Weiher, who prepared the report, did say, however. “The applicability of historical trends to the current U.S. price downturn may be limited.”

Previous housing slumps were often caused by steep drops in employment. At the onset of this market shift, employment was strong. Financing simply became more difficult to obtain, driving people out of the market.

This recovery may be different than the others as a result. Or it may not. Time will tell.

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Balancing Home Symbol And PercentageWhether you’re interested in investment property or simply happen to scan an ad for an income-producing property, odds are good that sooner rather than later, you’re going to hear the term “cap rate” or “cap”.

So what exactly is it?

A cap rate, or “capitalization rate” is simply the ratio between the net operating income a property produces, and the original price paid for the property.

To determine the net operating income or NOI, simply take the gross revenue a building produces and subtract all of its expenses except the mortgage and depreciation.

Then simply divide the NOI into the price of the property.

For example, if a building has a net operating income of $10,000, and it could be purchased for $100,000, it would have a cap rate of 10. $100,000/$10,000 = 10.

There are several ways of looking at a cap rate. One perspective is that it is simply a measure of how fast an investment will pay for itself. 

Using the property above as an example, the purchased property will pay for itself, or be “fully capitalized” after 10 years (100% divided by 10 percent).  If the cap rate were 5 percent, it would take 20 years for the property to be paid off.

Another way to view the cap rate is how much return the building would provide if it were completely paid off.  The 10 cap would be ten percent of the purchase price, which, compared to a savings account, is a nice return.

How can the cap rate be helpful when looking for investment property?

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Comments Off on A Little Sunshine Brightens Minneapolis Duplex Market

lying under sunWhile the warm days of summer may have yet to arrive in the Twin Cities, the real estate market looks as if it might be time to break out the sun screen.

New listings and pending single family home sales jumped the week ending June 6. Newly signed purchase agreements were up 33.4 percent over the same week last year. And while new listings were up from their Memorial Day mark, they were still down 4.3 percent from the same stretch last year.

Almost every statistic in the single family home market points toward sunnier days. The Months Supply of Inventory has dropped to 7.6 months, and there the Supply/Demand Ration has dropped to five houses on the market for every buyer.

What’s more, the number of traditional home sales (properties owned by people, not banks) was up to 57 percent of all transactions in the month of May. In January of this year, only 40.6 percent of the single family homes sold did not involve a financial institution in the negotiations.

The duplex market also shone brightly for the week. For only the third time in the last year, the average off market price of pended properties was higher, at $125,939, than last year’s average of $115,123. While 89.3 percent of last year’s sales were lender mediated, the mark for the first week of June in 2009 was down slightly to 88.6 percent.

In other sunny news, the number of new listings coming on to the market for the week dropped 21.2 percent. While 67.7 percent of last year’s new inventory was bank owned, 58.7 percent of this year’s promise to involve a lender in negotiations.

After a long, rainy winter, it’s good to feel the warmth of the sun again; even if the forecast promises more rain.

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trail in a green forestEvery day anywhere from 10 to 20 duplexes either are newly listed on the Twin Cities MLS, or have their asking prices reduced.

How can you tell which ones are good investments?

I suppose you could stop and do the math on each of them.  Of course, that would take a lot of time.

Is there a shortcut?

Over time, seasoned real estate investors and Realtors use to learn two tools to quickly assess whether or not a property is likely to be a good investment: the gross rent multiplier and something called a cap rate.

While the cap rate is a useful tool for larger commercial properties, I haven’t found it to be as effective a measure on smaller multi-family units. Nonetheless, I’ll discuss the cap rate later in the week.

The gross rent multiplier is a very simple math problem. To arrive at it, just take the asking price for a property and divide it by the amount of rent a building generates annually.

For instance, if a duplex is priced at $240,000, and the MLS indicates it is receiving $24,000 in rent for the year, 240,000/24,000 = 10. The gross rent multiplier is 10.

How do you use this number?

Generally speaking, the lower the gross rent multiplier number is, the more likely the duplex is to cash flow.

So if a property has a low GRM, do I recommend a client buy it?

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Rubber DucksThe first time home buyer tax credit is starting to feel like the carnival game Pick A Duck.

Congress seems to study the big prizes hanging on the wall, then the ducks floating past. They put down their money, study the ducks some more and finally, grab at what they are sure is the prize-winning bird as it floats by.

Apparently, however, instead of winning the giant stuffed bear, they keep winning Chinese finger traps.

First it was the $7500 first time home buyer tax credit that had to be repaid. Then came the $8000 first time home buyer tax credit, which was followed by the “which you can use immediately for closing costs” tax credit.

While many in the housing industry report these efforts have helped stimulate activity in entry-level housing, they have had little impact on move-up buyers and sellers. In other words, people who would like to sell their current duplex and move up to a larger property, or even those who would like to sell the family home and downsize.

Two stories in the Wall Street Journal this week hint that thanks to a push from the real estate industry, Congress is thinking about picking another duck.

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